February 21, 2017

The Rewa 750MW solar tender in Madhya Pradesh, India, saw
tariffs plunge to a record low of INR 2.97/kWh (US$0.044) after a lengthy
online auction. Acme Solar, Mahindra Renewables and Solenergi Power won 250MW
each. The tariff has an escalation of INR 0.05/kWh (US$0.0007) for 15 years,
resulting in a levelized tariff of INR 3.29/kWh (US$0.049) for 25 years, 24%
below the previous low of INR 4.34/kWh (US$0.065) as seen in NTPC’s Rajasthan
tender in January 2016. But adjusted for lower cost of equipment and changes in
other parameters, the fall is only about 2%.

The record low tariff can be attributed to large project
size and improved risk profile for the Rewa projects with unconditional state
government offtake guarantee and deemed generation compensation for grid
unavailability.

We believe that reduction in solar tariffs below INR3 level
will act as an inflection point for the solar sector and have long term
consequences on India’s future power generation mix. India has a low per capita
power consumption of 1,075kWh per year and still needs to build most of its
power generation capacity to catch up with peer developing countries such as
Brazil, Thailand and South Africa, which have 2-4x the per capita power
consumption of India.

It is time to add the fourth dimension of storage in India’s
power sector regulations

This auction makes solar PV a firm favourite for powering
India’s future economic growth. States looking to procure power and IPPs will
take notice and adapt their strategies accordingly. Successful bids for new
thermal power plants in India in the past two years have been between INR
3.93-4.98/kWh (US$0.059-0.074). For wind power, most states are still offering
FITs of about INR 4-6/kWh (US$0.06-0.09) although upcoming auctions may bring
that to about INR 4/kWh (US$0.066). Gas power is simply not viable in India due
to high cost (INR 5/kWh) and short supply of natural gas. This clearly makes
solar power a key contender for future power capacity addition in the country.

The key arguments against a full scale up for solar PV are
its intermittent nature, India’s evening peak power demand profile and the grid’s
ability to balance a surge in renewables. Solution to these issues
lies in cost effective energy storage and pricing for energy storage is moving
in the right direction.

India has already taken the first small step for adopting
energy storage. Recent tenders
announced by Solar Energy Corporation of India (SECI) aim to use
storage to smoothen the supply curve for solar power plants. The next step
would be to use storage with solar projects to carry out peak shifting and
match solar power’s generation profile with the country’s evening peak demand
profile. Realistically, this may still take a few years to become cost
competitive with thermal power but it looks like we are heading there.
India’s power sector regulations are defined for generation, transmission and
distribution and most regulations had to undergo changes over the past few
years to accommodate utility-scale and distributed renewable generation. It is
time to take out the editing pens again to add the fourth dimension of storage
in India’s power sector regulations.